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AT&T and Verizon Want the Option to Charge You Extra

The two companies oppose a proposal which would change the definition of broadband service.

It's hard to imagine a company outside the Internet service provider/mobile phone/pay television world that would openly take on the government to preserve rules that are bad for consumers even though it's not currently taking advantage of them.

It's not so difficult to picture, given their history of being less-than-consumer-friendly, that AT&T (NYSE:T) and Verizon (NYSE:VZ) would battle the Federal Communications Commission not to continue an existing practice, but to stick it to subscribers at a later date if they should choose to do so.

That's exactly what the two companies are doing. Both filed documents with the FCC that object to a proposal from the federal board that is supported by Netflix (NASDAQ:NFLX) and others. The federal commission's proposal seeks to declare that any Internet service with a data cap -- no matter how fast it is -- should not be considered broadband. That would work against data caps, but Verizon and AT&T want to keep data caps alive to preserve their ability to make money off of people who exceed them.

Verizon does not currently have data caps for its broadband customers. AT&T does but rarely actually charges customers for going over them, according to ArsTechnica. However, both companies want to preserve the right to use data caps and charge overage fees on service marketed as broadband should they decide to do so.

What do AT&T and Verizon want?While some mobile phone providers, T-Mobile most notably, have eliminated surcharges for customers who use more than their allotted data, AT&T and Verizon have not. Their efforts with the FCC would, if successful, give them the continued right to charge overages to their broadband customers if they go over data caps -- which, as mentioned above, neither actually does on a widespread basis now.

AT&T argued that pricing should have nothing to do with defining broadband, basically saying that as long as the service is offered at a speed which meets the standard, whether it's affordable or not does not impact whether it can legally be defined as broadband:

Despite Netflix's assertion that data usage thresholds should be accounted for in the Commission's deployment benchmarks, the Commission should not utilize pricing plans in its determination of whether advanced capabilities have been deployed to all Americans. ... Simply put, as is the case with countless products and services -- electricity, gas, food, water, to name a few -- those who use more, pay more. No one would ever suggest that electricity, gas, food, and water are not available because they are not provided on an unlimited, flat fee basis. The same is true for broadband services.

This argument actually does make sense -- a Porsche is still legally a sports car even though I can't afford one -- but the FCC is not merely defining broadband for technical purposes. It is doing so to set criteria for which companies qualify for subsidies when bringing broadband service to rural areas. This money, known as Universal Service funds, is supposed to support bringing high-speed Internet access to rural areas and to people with low incomes at "reasonable and affordable rates."

Under that criteria, the FCC has every right to define broadband in a way that keeps Universal Service funds away from companies which seek to build networks to impose surcharges on the very people the money is supposed to help.

A Verizon store Source: Verizon

Why AT&T and Verizon want thisAT&T and Verizon have not eschewed broadband overage charges out of any sort of kindness or desire to please customers. They have done so because before Netlfix and other streaming services people simply did not use that much data. That has changed dramatically in recent years partially because consumers are starting to drop their cable subscriptions in favor of alternatives (including Netflix).

Sandvine, a research firm that tracks Internet usage, said in its fall 2011 report that mean per subscriber monthly data usage was 22.7 GB, while its report covering the second half of 2013 showed that number grew to a mean of 44.5 GB. That's almost exactly a doubling in a short period of time and Netflix, which accounted for over 28% of data used in the second report, is partly to blame.

AT&T and Verizon are losing revenue on the cable side while providing the pipeline for their competition. Charging for heavier data use could, in theory, make up some of the revenue AT&T and Verizon lose on the pay TV side of their businesses, which makes data caps and overage charges very enticing.

Why it won't workAT&T and Verizon make a reasonable argument when they say that the definition of broadband should not be tied to pricing or data caps. But, even if the FCC listens and changes its proposed definition, any benefit from actually charging overage fees is likely to be short-lived.

As we have seen in mobile phones with T-Mobile, all it takes is one company to break the pricing mold in order to force others to do the same. In broadband, the only way charging overages and using data caps would work is if every provider implements them. That's unlikely in a market where the cable and phone companies that provide Internet access are battling each other for market share. Add in wild cards like Google Fiber and other tech companies seeking to provide Internet service in novel ways and you can see why the model AT&T and Verizon are fighting to protect has an expiration date.

Yes, there will always be customers with limited choice, forced to pay more, but on a broad level the ISPs face, or will face, too much competition to base their strategy on making up for lost pay TV revenue through overage charges.

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Daniel B. Kline is an accomplished writer and editor who has worked for Microsoft on its Finance app and The Boston Globe, where he wrote for the paper and ran the Boston.com business desk. His latest book, "Worst Ideas Ever," (Skyhorse) can be purchased at bookstores everywhere.
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